New Ways to Invest in Solar Like Buffett

Tom Konrad

Over the last couple of years, investors who were hoping to do
well by doing good have gotten bad sunburns. Since the start
of 2011, the two ETFs which track the solar sector, Guggenheim
Solar (NYSE:TAN) and Market Vectors Solar Energy (KWT) are down
74% and 75%, respectively, even after the large jumps up in the
first week of the year.

That jump was in large part caused by the January 2nd purchase of
two large solar projects by Warren Buffett controlled MidAmerican
Solar from Sunpower Corporation (NASD:SPWR.)

You might wonder, Why would a famously cautious investor like
Warren Buffett invest in a sector with such a lousy track
record?

The Difference Between Solar Manufacturing and Solar
Projects

The question is a bit of a red herring. As a value
investor, Buffett often invests in companies that have had poor
price performance: that’s where great values come from.

More importantly, MidAmerican Solar is not buying Sunpower the
company (down 41% since January 2011), but two of Sunpower’s solar
projects. The economics of solar manufacturers and solar
projects could not be more different.

Solar manufacturers like Sunpower
face fierce competition and have little pricing power
for their mostly undifferentiated products (solar cells and
modules.) Worse, the prices of these products have been
declining rapidly, squeezing margins. They also have little
control over the prices of their raw materials, which means they
find it difficult to pass price declines on to suppliers.
While offerend with the best intentions, changing incentive
regimes lead to boom and bust cycles for panel sales.

Solar farms and developers face a much different pricing
landscape. The price of solar panels (one of their largest
costs) has been falling rapidly, and many governments are working
to cut the balance of system and soft costs such as permitting
which are becoming a relatively large part of their cost
structure. More importantly, they almost always sell power
under long term contracts, providing a predictable income stream.
Incentive regimes are also more stable, with projects’
incentives often fixed when the project is built.

The better economics of solar development has not been lost on
solar manufacturers, many of whom have been developing their own
projects. It was two such projects that MidAmerican bought
from Sunpower.

Invest in Solar Like Buffett

Until recently, small investors’ ability to invest in solar
projects was limited to putting solar on the roof of their homes.
And this was a viable option for only a few: they had to own
a home with a suitable, un-shaded roof, live somewhere with a
favorable incentive regime, and be able to come up with several
thousand dollars (sometime tens of thousands of dollars) up front.

Mosaic allows small investors to invest in debt backed by
revenues from solar projects. Mosaic acts much like a bank
would, if many banks were interested in funding relatively small
solar projects. It first conducts due diligence on a project
to assure itself that project risks are acceptable. Such
risks include the creditworthiness of the power buyer, site
design, quality of the equipment, weather and insurance
adequacy.

If a project passes muster, Mosaic offers a loan against the
revenues from the solar PPA or solar lease. Mosaic then
funds this loan by parceling it off to the small investors on its
platform,
with a minimum investment of only $25. Mosaic
passes most of the interest on to the investors, and keeps a
slice to pay for its costs. The five projects offered on
Monday offered a 4.5% return to investors, with 1% retained by
Mosaic out of a 5.5% loan, and had terms of between eight and ten
years.

24 hours after they were
made available on Mosaic's site, only this project in
San Bruno had not been fully allocated to small
investors.

With long term CDs currently offering less than 2%, these
investments are proving very popular. As I write, barely 24
hours after the projects were listed on Mosaic’s website, the ones
open to small investors are almost fully subscribed, with only
$12,475 left unallocated on the largest of the three projects, a
102 kW project on an affordable housing complex in San Bruno, CA.

Because the SEC has not finished writing the rules that would
allow crowd-funding under the JOBS Act, these
investments were only available to residents of California and New
York state, when the Mosaic team has been working with state
securities regulators. Mosaic chose to work with these
states because that is where most of the investors who had signed
up for their platform live.

Mosaic also launched two projects available nationwide to
“accredited” (i.e. wealthy or high income) investors nationwide.
Such investors are presumed to have the resources to better
evaluate investments than small investors, and so Mosaic was able
to offer them a wider range of projects.

On behalf of an accredited investor, I was able to review these
two projects as well as the three open to small investors.
One was very similar to the three projects available to
small investors, with the exception of a slightly shorter duration
of eight years, compared to nine years for the others. The
final project stood out, in that it is larger than the other four
projects combined, and is located in New Jersey, rather than in
California. It also had the longest term, of twelve years
for the loan.

As I write, the smaller of the two accredited-only projects is
96% funded, but the large project is only 15% funded.
Nevertheless, I would be surprised if Mosaic fails to fully
fund the large project as well. With more to choose from,
accredited investors most likely did not need to rush to get in to
projects, as smaller investors did. (UPDATE: At noon on Jan
8th, the day after launch, all of Mosaic’s offerings except
except the large New Jersey project were fully funded.)

Risks and Rewards

The accredited investor I was working with eventually chose not
to invest. While a 4.5% 10 year CD would be a very
attractive investment, Mosaic’s offerings are not as low risk as
CDs, which are FDIC insured against loss of principal.
Although it appears that Mosaic does an excellent job
managing risk, that is nothing like a guarantee. Since she
is able to accept a high degree of risk, she has other attractive
investment available. For example, Power REIT, mentioned
above, isriskier than Mosaic’s offerings and currently yields
only 4%, but has the potential of significant upside and tax
advantages.

A small investor may also have more attractive options, the most
common of which is paying off debt. While interest in a
Mosaic solar investment will be taxable, the interest saved from
paying of a car loan or credit card debt is saved from after-tax
money, and so is essentially tax free, which makes
paying down debt at interest rates of 4% more more clearly more
attractive than the 4.5% on offer from Mosaic.

Yet Mosaic investments are less risky than most stocks and mutual
funds, and provide relatively attractive returns
in the current environment. For
an individual without debt to pay off, these seem like
attractive investments.

Mosaic President Billy Parish told me by email that the company
is working on making its investments available in tax-sheltered
accounts such as IRAs. That would make
Mosaic’s offerings attractive to more people, including
the accredited investor I was working with.

Not that I expect a Mosaic IRA offering any time soon. With
these solar investments selling like hot cakes, Mosaic’s priority
is almost certainly to bring more quality projects to its
platform.

DISCLAIMER: Past performance
is not a guarantee or a reliable indicator of future
results. This article contains the current opinions of the
author and such opinions are subject to change without
notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as
investment advice or a recommendation of any particular
security, strategy or investment product. Information
contained herein has been obtained from sources believed to be
reliable, but not guaranteed.